Related to Practice Sales
Buying and selling a dental practice is not an
uncommon occurrence for most practitioners.
At some point in your career you will likely
want to buy a practice after moving to a new
city or to expand in your local market. Maybe
you are at the end of your career and looking
for an exit strategy?
Whichever side of the deal you are on, the
Internal Revenue Code will loom large over
the transaction. Although both parties will
instinctively want to respectively buy low and
sell high the purchase price is not the bottom
line. The important aspect to consider is the
after tax profits received by the seller and the
basis in property received by the buyer.
By Keith B. Dunnagan, Esq. &
Matthew J. Kirkpatrick, Esq.
BPE Law Group
SDDS Vendor Member

BPE Law Group, PC attorneys, D. Keith B. Dunnagan,
is a graduate of Willamette
University School of Law
and Matthew Kirkpatrick is
a graduate of the McGeorge
School of Law. They maintain a corporate and real estate practice with a specialty
in assisting today’s dental
practitioners in business entity
formation, real estate transactions, and practice transitions.
They maintain offices in Gold
River and Sun City Lincoln
and you can follow them on
the web at www.bpelaw.com.

It is critical to make sure that you have the
right team of professionals assembled to ensure
that your purchase or sale goes smoothly.
Each side will need an accountant, a broker,
and an attorney. The brokers locate or list the
practice and act as the points of contact with
the other side. The attorneys draft and review
the various contracts that will encompass
the sale. Lastly, the accountant puts dollar
figures on the different configurations of the
arrangements.
After the sale the sellers will have to pay
some combination of ordinary income tax,
capital gains tax, and depreciation recapture
taxes. A seller’s goal is to push as much of
the profits into capital gains income as it is
taxed at lower a rate. Unfortunately unless
the shares or membership interest in the
practice are being sold each asset is treated
as a separate sale with its own tax. Payments
from non-compete clauses and gains that arise
solely because an asset has been depreciated
are taxed as ordinary income. Income from
the sale of goodwill and assets are taxed at
capital gain rates. As it is unlikely that your
company’s assets will be sold at much of a gain
beyond the depreciation deductions that have
been taken, the best way to ensure your profits
are taxed at capital gains rates is to allocate
the purchase price towards goodwill and away
from assets and non-compete clauses.
Buyers want to allocate the purchase price
towards assets to increase basis in depreciable
assets; ideally towards assets with short

16 | The Nugget • Sacramento District Dental Society

amortization schedules. This allows you to
deduct more of the purchase price sooner
and have a smaller amount realized upon
the asset’s eventual sale. Therefore, a buyer is
incentivized to negotiate the purchase price
allocation towards the company’s assets.
Neither the buyer nor the seller have an interest
in allocating any more of the purchase price
to a non-compete covenant than is necessary
to ensure it is enforceable. Sellers lose because
the payments are treated as ordinary income.
Buyers lose because they have to amortize
the payments over a 15 year period regardless
of the duration of the agreement. Instead
it would likely be better for both parties to
allocate more of the purchase price to the
capital assets.

“At some point in your
career you will likely
want to buy a practice...”
The theory behind this article is to ensure
that practitioners see a way to resolve the
inherent tension in a purchase and sale
transaction which arises from a focus on the
contract price. Both sides of the transaction
have a tendency to dwell on whether they
sold too low or purchased too high. This
focus completely misses the point of after tax
profits. A buyer may be willing to pay more
for a practice if the buyer is allowed to allocate
more towards the assets whereas a seller may
accept a lesser purchase price if allowed to
push the allocation onto a lower taxed item
such as goodwill.
This illustrates the importance of negotiating
over the value of the company’s individual
assets and the allocation of the purchase
price between the assets, goodwill, and any
accompanying non-compete covenants. Be
sure to include all of your professional team
in each part of the negotiation to ensure
that they are able to contribute the necessary
pieces of information and provide for the most
favorable tax outcome. 